A dark pool is a private financial forum for trading large volumes of securities that are not made available on public stock exchanges. Dark pools provide a strategic alternative for traders to buy and sell large blocks of shares while limiting market impact. By its very nature, dark pool trading is not transparent. Participating traders do not know price and size of the trades that are conducted until after the trades are executed.

Dark pools offer a unique opportunity for participants to maintain anonymity, obtain price improvements, access liquidity and reduce overall transaction costs. By gaining access to large blocks of orders, dark pool operators can offer more competitive prices than those available on the traditional public exchanges. Additionally, dark pools permit orders to be broken down into smaller chunks, which can add further liquidity to the market.

Increasingly, institutional investors are using dark pools for a variety of reasons, such as executing large orders without impacting the prices of the securities, obtaining better prices than can be found on a public exchange, or taking advantage of the reduced transaction costs. Although dark pools do offer some advantages for institutional investors, their lack of transparency and regulation has led to controversy in financial circles.

High-frequency traders (HFT) are one of the largest participants in dark pools and are frequently blamed for predatory trading practices that take advantage of order imbalances.

Dark pools also have been accused of creating conflicts of interest as their owners gain from any imbalance in trade execution. Without proper transparent oversight, they open the door to potential manipulation and increased volatility that harms the entire market. Because of the danger of price manipulation, exchanges and the Securities and Exchange Commission are examining the dark pool market more closely.

In spite of some potential risks, dark pools clearly offer investors undisclosed execution prices, therefore increasing all-over liquidity, reduced price impact and better pricing. As such, dark pools are likely to remain an integral part of the market structure, operating more transparently and more vigilantly, with participants cognizant of the potential risks.